NY futures continued to move slightly higher this week, with December gaining another 49 points to close at 65.42 cents.

Speculators made several attempts to take out the pivotal 66.50 resistance level in December, first last Friday and then again on Monday, but ultimately failed to hold intra-day highs of 66.64 and 66.63 cents going into the close.

Just how much money specs threw at the market during this latest push higher becomes evident from the big jump in December open interest, which increased by 16,810 lots or 1.68 million bales in just three sessions from last Thursday to Monday. There were 157,679 contracts open in December on Monday, which was the second highest amount ever for this date after 2008, when 162,841 lots were open on June 20.

The failure to push the market past resistance led to a temporary void of buying, into which the market collapsed on Tuesday, before trade support became evident and stabilized the market near 64.00 cents. From there the market was able to regroup, with today’s constructive export sales report and a slightly weaker dollar putting the bulls back in control.

US export sales of 275,300 running bales of Upland and Pima came in considerably above expectations! The fact that 178,100 bales were for shipment June/July tells us that mills still have a lot of cotton to cover. There were a total of 19 markets buying and 24 destinations receiving shipments of 175,200 running bales.

Total commitments for the current season have now risen to 9.45 million statistical bales, of which 7.75 million bales have so far been exported. There are still six-and-a-half weeks to go in the marketing year, with outstanding sales currently at 1.7 million bales. For the 2016/17-season there are now nearly 1.8 million statistical bales on the books.

July futures made a strong move today ahead of tomorrow’s First Notice Day. We suspect that there were once again some procrastinators caught with unfixed on-call sales, judging by the still relatively large open interest of 2,669 contracts before today’s session. The current certified stock of 135,161 bales only amounts to around half of that amount and with not much additional cotton available for certification, shorts had to buy their way out of trouble today.

It will be interesting to see whether the certified stock will be in play as July heads into the notice period. At 63 cents we would have said no, but above 65.00 cents some of the cotton might get tendered.

Chinese reserve auctions continue to be a success, even though only domestic cotton is currently being offered. Since the beginning of May no less than 4.2 million statistical bales have been auctioned off and according to local agencies mills may be in need of 11.5 million bales before new crop arrives this fall.

If this were true, it would cast some doubt on the Chinese balance sheet, since there should not be that much cotton needed to tie mills over to new crop. The USDA and Cotlook both have the Chinese production gap for this season at 10.0 million bales. Since China has already imported around 3.7 million bales and will probably have taken in a total of 4.2 million bales by the end of July, mills would require only about 5.8 million bales from the Reserve, assuming that their mill stocks don’t change since the beginning of the season.

Therefore, the only reason why Chinese mills would need an additional 5-6 million bales is if demand is a lot stronger than assumed. Fortunately China has plenty of stocks to meet any additional mill demand, but from a statistical point of view this would be supportive to the global market.

So where do we go from here? We currently have a situation in which inventories are very tight, with most major exporters either being sold out or having very little additional cotton left for sale. The US and Australia still have some quantities available, but other than that mills have to scratch the bottom of the barrel to find some supplies.

Against that we have the promise of new crop cotton, which is still about 3-4 months away from being harvested, with a lot of weather scares to get through. We therefore see no price pressure in the physical market and that will only change if the Northern Hemisphere crops reach their potential.

From a technical point of view the market is still in an uptrend channel that had its origin on February 29. However, upside momentum has started to stall and the market has now closed the last 15 sessions in a range between 63.50 and 66.50. Speculators have thrown a lot of money at the long side in order to keep this trend going and it remains to be seen how much more they are willing to commit.

There are two important chart points to keep an eye on. The first is the 66.50 resistance level and the second is the uptrend line that currently runs through around 63.00 cents today. Since the uptrend line is moving higher over time it could catch up to a sideways trending market in a couple of weeks. Sooner or later we will get a break through support or resistance, which will trigger the next major move.

In the short term the Brexit vote, which will be decided later today, could be a major market mover. A ‘stay’ vote would be supportive for financial markets, while a ‘leave’ vote could send them into turmoil.

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